NZ announces second set of ETS reforms

On 16 May 2019, the New Zealand government proposed a second tranche of reforms to the New Zealand Emissions Trading Scheme (NZ ETS). Together with the first set of changes announced in December 2018 and some forestry-specific changes announced in March 2019, the reforms are intended to pass into law later this year in a bill amending the Climate Change Response Act 2002 (CCRA), which serves as the legislative framework for NZ ETS.

The following changes are part of the second tranche:

Phasing out Fixed Price Option (FPO): The current FPO (NZD 25) will transition to an alternative measure for cost containment, a cost containment reserve (CCR). The FPO is to be removed when auctioning begins (expected in late 2020), but no later than 31 December 2022. Minister for Climate Change James Shaw has previously suggested that the FPO could be raised in the meantime but said in the announcement of the latest reforms that it will remain at the current level to the end of 2019.

Allowing a price floor: The reforms will allow for the introduction of a price floor in the form of an auction reserve price (ARP), should this be required in the future.

Preparing for auctions: An independent auction monitor will be appointed to provide oversight and limit the risk of anti-competitive behavior. Further decisions on auctions, such as the use of proceeds, are yet to be made.

Strengthening compliance: As a reaction to the review of the NZ ETS in 2015-2016, measures against non-compliance will be strengthened for participants who have failed to surrender or repay units by the due date at a rate of three times the current market price per unit.

More detailed public data: With data only being published at an aggregated level, there have been repeated requests from the public to increase transparency. From 2021, the government intends to publish emissions and removals data at the level of individual participants to increase transparency and public understanding of the NZ ETS.

Establishing a separate market governance work program: The government decided to establish a separate work program to deal with market governance options in depth, including on the issue of market manipulation, before final decisions are taken and implemented at a later date.

Further decisions on industrial-sector allocation, specifically the plan to phase out free allocation, are expected in the coming months. Both sets of reforms, the Climate Change Response (Zero Carbon) Amendment Bill, the forestry-specific changes, and potentially changes to industrial-sector allocation are expected to pass into law as a single bill by the end of 2019.